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$285,000
X $312,000 = $296,400 Value assigned to bonds
$300,000
$475,000
$500,000 X $515,000 = $489,250 Value assigned to bonds
SANDS CORP.
Journal Entry
September 1, 2008
Schedule 1
Premium on Bonds Payable and Value of Stock Warrants
Sales price (5,200 X $1,000 X 1.02) $5,304,000
Deduct value assigned to stock warrants
(5,200 X 2 = 10,400 X $5) 52,000
Bonds payable $5,252,000
Schedule 2
Accrued Bond Interest to Date of Sale
Face value of bonds $5,200,000
Interest rate 9%
Annual interest $ 468,000
$5,280,000
$5,500,000 X $5,555,000 = $5,332,800 Value assigned to bonds
$220,000
$5,500,000 X $5,555,000 = $222,200 Value assigned to warrants
Cash........................................................ 5,555,000
Bonds Payable ............................... 5,332,800
Contributed Surplus—Stock Warrants 222,200
(c) The reason why Farhad Limited would add the warrants to
the bond is to add a ―sweetener‖ to the bond. The
sweetener provides an additional equity instrument to the
bondholder, which has value. In exchange for the added
value of the warrant, Farhad Limited might be able to
market the bond with a lower coupon rate or at a lower
discount or higher premium price. Overall the interest costs
on the bond are reduced. It is also possible that without the
addition of the warrant as a sweetener, investors would not
purchase the bonds. This would in turn not provide Farhad
with the necessary financing it wishes to obtain from the
bond issue.
PROBLEM 16-3
(a) The entry for the issuance of the notes on January 1, 2008:
The present value of the note is: $1,200,000 X .56743 (factor
for a single payment in 5 years at 12%) = $680,912 (Rounded
by $4).
January 1, 2008
Cash ............................................................... 1,000,000
Notes Payable................................................ 680,912
Contributed Surplus—Stock Warrants.. 319,088
PROBLEM 16-3 (Continued)
(b)
The amortization schedule for the zero note is:
(c)
December 31, 2008
Interest Expense ........................................... 81,709
Notes Payable ......................................... 81,709
PROBLEM 16-5
Under the book value method, the pro-rata carrying value of the
Bonds Payable, and Contributed Surplus – Stock Options would
be removed and a corresponding net entry to Common Shares
would result. No gain or loss on redemption would result.